Apple Stock: This Is What to Watch When Apple Inc. Reports Earnings

Apple StockEarnings Could Be a Catalyst for AAPL Stock

Apple Inc. (NASDAQ:AAPL) stock started losing its appeal about a year ago. Its most recent earnings report in April sparked the latest round of downturns. Now that the company is reporting earnings again, could it do even more damage to Apple stock?

It’s possible, but the damage could be limited.

First, let’s take a look at what analysts are expecting…

For the third quarter of Apple’s fiscal 2016, Wall Street is expecting revenue of $42.11 billion, down 15.1% year-over-year. The bottom line is expected to deteriorate as well, from $1.85 in earnings per share in the year-ago period to just $1.38 per share. (Source: “Analyst Estimates,” Yahoo! Finance, last accessed July 25, 2016.)

Note that last time it reported, investors learned about Apple’s first year-over-year decline in quarterly revenue since 2003. Moreover, the company’s guidance range suggested that the downward trend in revenue is likely to continue. (Source: “Apple Reports Second Quarter Results,” Apple Inc., April 26, 2016.)

iPhone Sales Won’t Help Apple Stock

The No. 1 reason behind Apple’s revenue drop was its core product—the “iPhone.” iPhone sales made up nearly 65% of the company’s total revenue. Therefore, when iPhone unit sales experienced a 16% year-over-year decline in the second quarter of Apple’s fiscal 2016, revenue was bound to fall. (Source: “Apple Inc. Q2 2016 Unaudited Summary Data,” Apple Inc., April 26, 2016.)

The weakness in iPhone sales could very likely continue into this reporting quarter. The reason is simple: Last time, iPhone sales slowed down partly because of anticipation for the “iPhone 7,” which is expected to be released this September. As the reporting quarter gets even closer to the release date of this new device, consumers have more incentive to wait. Therefore, if it is iPhone sales that investors are looking forward to, then they are likely to get bad news. Since iPhone sales remain the biggest contributor to the company’s revenue, another quarter of year-over-year sales decline does not fare well for Apple stock.

If the iPhone is not doing well, what about Apple’s other devices? Well, there likely won’t be good news there either. Both the “iPad” and the “MacBook” experienced double-digit unit sales drops in the previous quarter. Given the shrinking market of tablets and computers today, these two probably won’t be growth drivers in the reporting quarter.

This Could Be the Next Big Catalyst for Apple Stock

However, there is still something that could give the company, along with Apple stock, a brighter outlook and it’s not an “iGadget.”

What is it? It’s Apple’s services segment. Over the years, the company’s device sales skyrocketed. While they have slowed down in recent months, many users who bought Apple’s products remain within the company’s ecosystem. In fact, earlier this year, the company announced that its active installed base has surpassed one billion. (Source: “Q1 16 Earnings Supplemental Material,” Apple Inc., January 26, 2016.)

How can Apple make money from its giant userbase? It charges a fee to host apps in the “iOS” “App Store,” takes a cut when users make purchases in the App Store, and makes money from “Apple Pay,” “Apple Music,” and other services.

The company’s services segment is already growing at an impressive pace. In Apple’s second quarter of fiscal 2016, services revenue surged 20% year-over-year to $6.0 billion. If the reporting quarter turns out to be a solid one for Apple’s services segment again, it could inject some much-needed optimism to Apple stock.

Apple Stock: A Huge Bargain?

The earnings season could be tricky because many companies are trading at lofty valuations. When a company is trading at 300 times its earnings, any sign of a slowdown could trigger a sell-off. But Apple is not one of them. In fact, Apple stock is trading at less than 11 times its earnings. Moreover, the tech giant also pays a quarterly dividend with an annual yield of 2.34%.

Even if iPhone sales disappoint again, the low valuation, solid dividends, and a booming services segment should be able to put a bottom under Apple stock.